Energy stocks rebound late, post gains for week

Sector breaks out of broad market sell-off amid Mideast violence

NEW YORK (MarketWatch) -- U.S. energy stocks broke out of a broad market sell-off Friday, hitching a ride on another sharp spike in crude prices to reclaim territory lost over the past two days.

Record-high oil prices continued to weigh heavily on the broad market, sending the Dow Jones Industrial Average
to its third-straight day of triple digit losses.

Indexes, after tracking the sector flat to lower much of the session, roared back late, leaving the Amex Oil & Gas Index
DJIA, +0.25%
with a 0.9% gain at 1,177.19 points. Despite the volatility, the index only gained 0.9% for the week.

The Amex Natural Gas Index
XOI, +0.28%
advanced 0.4% to 416.43, up only 0.2% for the week, while the Philadelphia Oil Service Sector Index
$OSX
finished with a 0.7% gain at 208.15, the best performer in the sector this week, up 2.1% from last Friday's close.

On the New York Mercantile Exchange, the benchmark oil contract hit an all-time high overnight of $78.40 a barrel, backing down to $77.03, a gain of 33 cents, and a record-high close. For the week, the front-month August contract rose 4%, a move analysts said puts it well within reach of $80 next week.

Israel stepped up its offensive against Lebanon on Friday, bombing the Beirut airport for a second day, as well as roads and power and communications infrastructure.

"The nations currently involved have little oil production," said James Williams, an economist at WTRG Economics.

"This underscores the real problem, which is limited spare oil-production capacity and a general belief that oil prices can only go up," he said. See crude futures.

Analysts remain upbeat on crude and oil and gas companies.

Earlier, Merrill Lynch upgraded Canadian oil company Nexen to buy from neutral and raised price targets for Chevron Corp. and Hess Corp. The brokerage now has buy ratings on 10 of the 29 stocks included in its oil and gas coverage.

"For well over a year, (almost 2), we've espoused an investment thesis which has emphasized oil leverage (US integrateds or select independents), or balanced companies (a more even mix of oil and natural gas production), free cash flow, solid management teams, visible production growth, and good balance sheets," said analyst John Herrlin.

Nexen
OSX, +0.74%
outperformed the broader market to trade up 2.2% at $55.83, while Chevron
CVX
added 2.2% to $66.38 and Hess
CVX, +0.56%
rose 3.5% to $56.02, leading percentage gainers. Exxon Mobil finished the day at $64.90, up 83 cents, or 1.3%.

Separately, UBS raised its oil-price forecast for 2006 and 2007 and said its view remains "structurally bullish."

Analyst Andrew Potter's now expecting an average oil price of $68.40 a barrel in 2006, up from a previous forecast of $64. He also sees $69 in 2007, up from his previous outlook of $66.

Real and anticipated supply issues should keep the market on edge, he said.

Valero Energy
HES, +0.32%
added 0.5% to $64.90. The company's Valero GP Holdings unit debuted on the New York Stock Exchange earlier under the ticker "VEH."

The unit consists of Valero's interests in its natural-gas midstream subsidiary Valero L.P.
VLO, -0.91%
. It ended the session unchanged at $22.04, while Valero L.P. moved up 4 cents to $48.99.

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